The Myth of the "Winner's Curse" in Auctions of Capital Goods

The winner’s curse was “discovered” in low rates of return on certain types of capital goods acquired in auctions or negotiated acquisitions. The inference was that companies were systematically bidding amounts in excess of their presumed “common investment worth.” In exploring this phenomenon, experimental auctions have uncritically relied on this exogenous ex ante standard of common capital worth. However, experiment auction are irrelevant to auctions of capital goods. Capital goods imply strategies for their employment. But an assumed common investment worth implies an absence of differentiated strategies. In fact, the prospective investment worth of a capital good inheres in strategically sought complementarities in the production of often distinctively differentiated goods and services. Hence, there is no likelihood that capital goods would ever have an appraised worth common to competing bidders. Bids can only be assessed ex post in the success or failure of an entrepreneurial strategy. This inquiry suggests a revised interpretation of the winner’s curse.